Bank of Canada governor Stephen Poloz took the unusual step Tuesday of weighing in on government policy as he expressed support for Ottawa’s proposal to expand the Canada Pension Plan.
A tentative agreement to enhance the public pension plan, signed by eight provinces over the summer, calls for a gradual increase in mandatory contributions with the goal of boosting benefits for future generations of retirees.
But pension plan reform, which still needs support from British Columbia or Quebec to move forward, faces opposition. Some argue it would create new costs for employees and employers in the context of an already-weakened economy.
After delivering a speech in Quebec City, Poloz was asked about the CPP-expansion proposal and Quebec’s decision to refrain from supporting the agreement-in-principle.
“Firstly, I don’t want to offer a comment on fiscal policy, particularly on Quebec,” Poloz told a news conference in French, after giving an address that focused in part on the risks that current economic conditions pose to Canadians’ nest eggs.
“But it’s certain that the CPP adjustments are part of the solution. It’s the objective of the government to increase the funds that are available to people, and it will take time for it to be complete, but it’s a positive change.”
He continued by saying CPP is part of the solution for Canadians who are planning for their retirements in today’s challenging era of low interest rates, which he predicted Tuesday will last a long time.
Poloz added that pension plan expansion could also lift consumer confidence.
The central banker’s comments came a day after the federal government offered its take on how the CPP proposal could affect the economy and jobs.
The Liberal government said during that the proposed implementation period of 2019 to 2025, the changes could lower growth of the economy by as much as 0.05% and employment growth by up to 0.07%.
Beyond 2025, Ottawa predicted economic growth could be as much as 0.09% higher due to the CPP changes, while employment growth could be up 0.06%.
Under the proposal, contributions by employees and employers would gradually increase over seven years starting in 2019. Once the changes are fully implemented in 2025, Canadians would pay between $9 and $42 more into the plan every two weeks.
The Liberal government, which has been spearheading the plan, has highlighted Finance Department numbers warning that about a quarter of Canadian families aren’t saving enough for retirement.
In his speech Tuesday to an audience of economists, Poloz said that since stubbornly low interest rates are expected to stick around for a while, it’s time for people to revisit their retirement plans.
The bank’s benchmark interest rate has remained at a low level of 0.5% for more than a year. And, as the bank tries to boost the feeble economy, the rate is not expected to start climbing any time soon.
“Young folks with mortgages regularly walk up to me and thank me for keeping interest rates low … They even do selfies,” Poloz joked during the speech.
“But I also hear from other people, especially retirees. They’re unhappy because they’ve saved their whole lives and are getting very little income from those savings today.”
To ensure an adequate retirement, Poloz suggested Canadians consider saving more, working longer than planned and changing their investment mix to adjust to the persistently low interest rates. The need to do so, he added, is compounded by the fact Canadians are living longer.
In this low-rate environment, Poloz also said businesses should temper their expectations when it comes to a minimum acceptable return on their investments. He added that 4% will probably turn out to be a “pretty good return.”
Poloz said there’s also a need to encourage policy-makers to pounce on smaller morsels of economic opportunity — even if each one on its own offers only a slight improvement.
Governments should continue their pursuit of new trade opportunities, more investment in infrastructure, and taxation and immigration policies to help promote the growth of new firms.
While none of these recommendations are a “silver bullet,” Poloz said when combined they could make a large difference in improving Canada’s economic prospects down the road.
“With a projection that Canada’s economic potential is likely to grow by only around 1.5%, which is not very inspiring, we need to take every decimal point more seriously than we have in the past,” he said.
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